Stock Option Cost Allowability Runs Aground on Black-Scholes

In a recent case, the Armed Services Board of Contract Appeals considered, for the first time, the allowability of stock option costs valued in accordance with the Black-Scholes model. In Luna Innovations, Inc., Luna awarded stock options to certain employees as a part of its compensation plan and, in accordance with generally accepted accounting principles, accounted for stock options based upon the fair market value of the stock options as of the grant date, using the Black-Scholes model. ASBCA held that stock option costs measured using the Black Scholes formula are unallowable, but did not find the costs to be expressly unallowable.